An SBIR/STTR notice of award is exciting.

 

It means the company is moving from proposal planning to funded work.

 

But before spending begins, the company should slow down and review the award terms carefully. The accounting system should not be set up from memory, from the proposal draft, or from a generic bookkeeping template.

 

It should be set up around the actual award.

 

The award type, approved budget, payment terms, reporting requirements, indirect rate treatment, cost share obligations, prior approval rules, and closeout requirements all affect how the company should track costs after award.

 

At Peter Witts CPA PC, we help SBIR/STTR awardees review award terms and set up accounting systems that support federal funding requirements before payroll, purchases, drawdowns, invoices, or reimbursements begin.

 

Why Award Terms Should Drive Accounting Setup

 

Accounting setup is not just about choosing software or creating accounts.

 

It is about building a system that can support the specific award.

 

A strong award accounting setup should answer:

• What type of award did the company receive?
• What budget categories were approved?
• How will funds be paid?
• What reports are required?
• What indirect rate was approved?
• Is cost share or matching required?
• Are there prior approval requirements?
• Are consultants or subcontractors included?
• Are equipment or travel costs restricted?
• What records must be retained?
• What closeout reports will be due?

If the accounting system is set up before these questions are answered, the company may need to rebuild records later.

 

Start With the Official Award Document

 

The first step is to review the official award document.

 

For NIH grants, the Notice of Award is the legally binding document that notifies the recipient of the award, contains or references the terms and conditions, states federal funding limits and obligations, and provides the documentary basis for recording the federal obligation.

 

Other agencies may use different documents, portals, contracts, cooperative agreements, or award terms.

 

The company should save and review:

• Notice of Award
• Contract or grant agreement
• Approved budget
• Budget justification
• Statement of work
• Terms and conditions
• Agency-specific award conditions
• Payment instructions
• Reporting instructions
• Prior approval terms
• Closeout requirements
• Agency correspondence

The official award file should become the foundation for accounting setup.

 

Confirm the Award Type

 

The award type affects accounting requirements.

 

An SBIR/STTR company may receive a grant, cooperative agreement, fixed-price contract, cost-reimbursable contract, cost-plus-fixed-fee contract, milestone-based award, or another funding structure.

 

Before setting up the accounting system, confirm whether the award is:

• Grant-based
• Contract-based
• Fixed-price
• Cost-reimbursable
• Milestone-based
• Reimbursement-based
• Advance-payment based
• Phase I
• Phase II
• Fast Track
• Direct to Phase II
• Follow-on or supplemental funding

This matters because a cost-reimbursable contract may require stronger actual cost tracking, timekeeping, labor distribution, indirect rate support, and billing documentation than a fixed-price award.

 

SBIR.gov notes that for contractors new to cost-reimbursement contracts, such as DoD Phase II SBIR/STTR contractors, passing a pre-award accounting system survey can be a major hurdle.

 

Compare the Approved Budget to the Proposal Budget

 

The approved budget may not match the proposal budget exactly.

 

Agencies may reduce costs, move categories, cap certain items, change indirect cost treatment, adjust fee, remove equipment, or apply special restrictions.

 

Before creating project codes or budget reports, compare:

• Proposed budget
• Approved budget
• Approved direct costs
• Approved labor
• Approved fringe
• Approved consultants
• Approved subcontractors or subawards
• Approved travel
• Approved equipment
• Approved other direct costs
• Approved indirect costs
• Approved fee or profit
• Approved TABA, if applicable
• Approved cost share, if applicable

The accounting system should be built around the approved budget, not the budget originally submitted.

 

Set Up Project Codes Around the Award

 

The accounting system should allow the company to track costs by award, project, phase, or cost objective.

 

At minimum, the system should identify costs for the specific SBIR/STTR award separately from:

• General business activity
• Internal R&D
• Commercialization activity
• Fundraising
• Sales and marketing
• Other federal awards
• Customer-funded work
• Non-award costs
• Unallowable costs

SBIR.gov explains that a good accounting system should differentiate direct costs from indirect costs, isolate unallowable costs, and maintain costs under general ledger control.

Project codes should be set up before the first cost is incurred.

 

Map Budget Categories to the Chart of Accounts

 

The chart of accounts should support the approved budget.

 

This does not mean every budget line needs a separate account, but the company should be able to report costs in a way that aligns with the award categories.

 

Map accounts for:

• Direct labor
• Fringe benefits
• Materials and supplies
• Consultants
• Subcontractors or subawards
• Travel
• Equipment
• Other direct costs
• Indirect costs
• Fee or profit
• TABA, if applicable
• Cost share, if applicable
• Unallowable costs

If the accounting system cannot produce budget-to-actual reports by approved category, reporting and closeout may become more difficult.

 

Review Payment Terms Before Cash Is Needed

 

Payment terms should shape the accounting process.

 

Depending on the award, payment may occur through:

• Advance drawdowns
• PMS cash requests
• Reimbursement requests
• Contract invoices
• Vouchers
• Milestone payments
• Progress payments
• Scheduled payments

NIH award materials explain that PMS is used for grant payments and that payment instructions are provided for obtaining funds.

 

Before spending begins, confirm:

• How payment requests are submitted
• Who has system access
• What documentation is required
• Whether payment is advanced or reimbursed
• Whether invoices or vouchers are required
• How often requests can be submitted
• How payment activity is reconciled
• Whether cash-on-hand rules apply
• Whether payment depends on progress or milestones

The accounting system should support the payment method before the first drawdown, invoice, or reimbursement request.

 

Set Up Drawdown or Invoice Support

 

The company should know what records will support payment requests.

 

Payment support may include:

• General ledger detail
• Payroll records
• Timesheets
• Labor distribution reports
• Vendor invoices
• Consultant invoices
• Subcontractor invoices
• Indirect rate schedules
• Budget-to-actual reports
• Payment history
• Prior approvals
• Agency correspondence

If the company waits until the first payment request to organize support, the process can become stressful.

 

The support file should be designed when the accounting system is set up.

 

Review Reporting Requirements

 

Reporting requirements should shape the monthly accounting calendar.

 

NSF explains that SBIR/STTR projects have reporting requirements that differ from standard NSF awards, and that NSF SBIR/STTR awards have terms and conditions tailored to the program’s unique requirements and expected outcomes.

 

Reporting may include:

• Financial reports
• Technical reports
• Progress reports
• Federal Financial Reports
• RPPR or Final RPPR
• Life Cycle Certifications
• Invention reports
• Cost share reports
• Subcontractor or partner reporting
• Closeout reports

Before setting up the system, identify:

• What reports are required
• When reports are due
• Which financial data is needed
• Who prepares each report
• Who reviews each report
• Where support files are stored
• How reports tie to the general ledger

A report due months later should influence the accounting structure from day one.

 

Review Indirect Rate Treatment

 

Indirect rates should be reviewed before accounting setup is finalized.

 

The award may approve a specific rate, use a provisional rate, cap recovery, require a negotiated rate, allow a de minimis rate, or treat indirect costs differently based on agency or award type.

 

Before spending begins, review:

• Approved indirect rate
• Rate type
• Cost pools
• Allocation base
• Fringe treatment
• Overhead treatment
• G&A treatment
• Unallowable cost exclusions
• Whether the rate is provisional or final
• Whether actual rates must be tracked
• Whether rate schedules are needed for billing or reporting

SBIR.gov explains that indirect rates are company-specific and should be based on the organization’s own accounting system, budget, or projected cost categories.

 

The accounting system should be able to produce the data needed to support the rate.

 

Review Cost Share or Matching Requirements

 

SBIR/STTR cost share should never be assumed.

 

SBIR.gov notes that cost sharing cannot be required of SBIR/STTR applicants for Phase I and Phase II, although it may be encouraged. Some follow-on, agency-specific, commercialization, or related funding paths may still involve matching, third-party funding, or cost share-like requirements.

 

If cost share or matching applies, the accounting system should track it separately from federal funds.

 

Review:

• Required cost share amount
• Source of non-federal funds
• Third-party contributions
• In-kind support
• Matching documentation
• Project codes
• Reporting requirements
• Closeout requirements

Cost share should not be tracked informally in a spreadsheet after the fact.

 

Review Consultants, Subcontractors, and Research Partners

 

If the award includes consultants, subcontractors, universities, or research partners, the accounting system should be ready to track those costs separately.

 

Set up tracking for:

• Approved partner budget
• Agreement or scope of work
• Invoice detail
• Deliverables
• Payment terms
• Period of performance
• Travel costs
• F&A or indirect cost treatment
• Budget-to-actual status
• Closeout documentation

Partner costs can create reporting and documentation issues if they are treated like ordinary vendor expenses.

 

Review Equipment and Travel Terms

 

Equipment and travel should be reviewed before the accounting system is finalized.

 

For equipment, review:

• Approved equipment budget
• Capitalization policy
• Prior approval requirements
• Property tracking
• Location and use
• Disposition requirements

For travel, review:

• Approved travel budget
• Domestic or foreign travel
• Conference costs
• Travel policy
• Receipts and expense reports
• Prior approval requirements
• Project purpose documentation

These costs may be smaller than labor, but they often create documentation issues if the system does not track them clearly.

 

Review Unallowable Cost Treatment

 

The accounting system should make unallowable costs visible.

 

Unallowable costs should not disappear from the books. They should be recorded clearly and excluded from billings, drawdowns, reimbursement requests, proposals, claims, and indirect rate calculations when required.

 

Set up accounts or codes for:

• Fundraising
• Investor activity
• Certain lobbying costs
• Entertainment
• Sales and marketing, when not allowable
• Non-award commercialization costs
• Costs outside the period of performance
• Unsupported costs
• Other restricted or unallowable activity

The company should have a process for reviewing questionable costs before payment requests are submitted.

 

Review Closeout Obligations

 

Closeout requirements should be considered before spending begins.

 

2 CFR 200.344 addresses federal award closeout and explains that final reports and adjustments may be required, including adjustments to reflect disallowed costs or deobligation of unliquidated balances.

 

Closeout may require:

• Final financial reports
• Final technical reports
• Final invention reports
• Final drawdown or invoice reconciliation
• Payroll support
• Vendor and consultant support
• Subcontractor closeout
• Indirect rate review
• Equipment records
• Cost share support
• Record retention

If the accounting system is not designed for closeout, the company may spend significant time rebuilding records at the end of the award.

 

Build the Monthly Review Process Before Spending Begins

 

A good accounting setup includes a monthly review process.

 

Each month, the company should review:

• General ledger activity
• Project coding
• Payroll and timekeeping
• Labor distribution
• Vendor invoices
• Consultant and subcontractor costs
• Travel and equipment
• Indirect cost schedules
• Drawdowns or invoices
• Budget-to-actual reports
• Cash flow
• Prior approval questions
• Documentation gaps

2 CFR 200.302 requires financial management systems to identify federal awards, maintain records showing the source and use of funds, and compare expenditures with budget amounts for each federal award.

 

Monthly review helps keep the award ready for reporting, billing, reimbursement, and closeout.

 

Create an Award Setup Checklist

 

Before spending begins, create an award setup checklist.

 

A practical checklist should include:

• Save the official award document
• Confirm award type
• Review approved budget
• Compare proposal budget to approved budget
• Set up project codes
• Map budget categories to the chart of accounts
• Set up timekeeping
• Set up labor distribution
• Review payment terms
• Create drawdown or invoice support files
• Review reporting requirements
• Review indirect rate treatment
• Track cost share, if applicable
• Set up consultant and subcontractor files
• Review travel and equipment terms
• Set up unallowable cost accounts
• Build budget-to-actual reports
• Create document storage folders
• Assign internal responsibilities
• Schedule monthly reviews
• Review closeout obligations

This checklist helps the company move from award notice to award performance with more control.

 

Common Accounting Setup Mistakes

 

SBIR/STTR awardees often run into trouble because they set up accounting too quickly or too generically.

 

Common mistakes include:

• Using the proposal budget instead of the approved budget
• Not reviewing the award type
• Failing to set up project codes
• Tracking costs only by broad expense category
• Not separating direct, indirect, and unallowable costs
• Starting work before timekeeping is ready
• Not connecting payroll to labor distribution
• Ignoring indirect rate treatment
• Not reviewing payment terms before spending
• Waiting until the first drawdown or invoice to gather support
• Treating consultant and subcontractor costs like ordinary vendor bills
• Not tracking cost share separately
• Forgetting reporting deadlines
• Not considering closeout until the end of the award

These issues are easier to prevent before the first transaction is recorded.

 

Questions to Ask Before Setting Up the Accounting System

 

Before setting up or revising the accounting system, ask:

• What type of award did we receive?
• What budget did the agency approve?
• How should each budget category be tracked?
• How will payment work?
• What documentation supports payment requests?
• What reports are required?
• What indirect rate treatment applies?
• Is cost share or matching required?
• Are consultants or subcontractors included?
• Are travel or equipment costs restricted?
• Which costs may be unallowable?
• What prior approvals may be needed?
• What closeout records will be required?
• Can our accounting system produce budget-to-actual reports?
• Who will review records each month?

These questions help make the accounting setup award-specific instead of generic.

 

Final Thoughts: Accounting Setup Should Start With the Award Terms

 

The right accounting setup begins with the award terms.

 

Before spending begins, SBIR/STTR awardees should review the award type, approved budget, payment terms, reporting requirements, indirect rate treatment, cost share obligations, consultant and subcontractor costs, equipment and travel rules, unallowable cost treatment, and closeout obligations.

 

At Peter Witts CPA PC, we help SBIR/STTR companies set up award accounting correctly so costs are tracked, documentation is organized, payment requests are supported, and reports are easier to prepare.

 

Need Help Setting Up Your Award Accounting Correctly?

 

If your company recently received an SBIR/STTR award or notice of award, Peter Witts CPA PC can help review the financial terms before spending begins. Our team can help set up project codes, budget categories, timekeeping, labor distribution, indirect rate support, drawdown or invoice files, documentation folders, and monthly review processes.

Backed by 35+ years of government contract accounting experience and first-hand DCAA knowledge, our team helps innovators build award accounting systems that support federal funding performance from day one.

 

Schedule a strategic consultation with Peter Witts CPA PC to set up your award accounting correctly.